New investment principles for DSO transition

UK Power Networks publishes vision for future role of distribution networks operators in the energy system

UK Power Networks has published its vision for transitioning to a distribution system operator (DSO) in a future energy system characterised by distributed energy resources and low carbon technologies.

In a new report, which marks the start of a consultation on its vision, UKPN said the transition will require “substantial investment”.

However, it is confident that it has “identified a set of investment principles that allow the first steps to be taken with minimal regret”.

The same principles will also enable the networks industry as a whole “to make the right investments in the future” said the document – though it was also suggested that networks might require new spending allowances in the future to reflect the new value and risks that DSOs must take on.

The report explained that the scale of investment needed for the transformation of DNOs into DSOs, combined with uncertainty around “the timing of key external drivers, such as the rate of EV uptake and the pace of technology change” mean that making the right investment decisions with confidence is challenging.

“Heading too far in the wrong direction could lead to stranded investments, which impose unnecessary costs on our business and our customers,” it warned, adding: “Investing in technologies early can be expensive, and carries the risk of it being superseded, whereas investing later could mean that we struggle to meet our customers’ needs.”

In order to overcome this investment challenge, and to enable a more clearly defined price tag to be attached to the creation of DSOs in the UK, UKPN said: “We first want to listen and understand our customers and stakeholders current and future needs to inform our prioritisation of organisational change and investment.”

The network operator assured that it is collaborating widely with the industry to gain this understanding and to create a framework which can evaluate the costs and benefits of the DSO transition.

In the meantime, it explained that five investment principles are guiding it. These are:

1. Make sure our planned investments are consistent with the emergent DSO role, and can support the full DSO role if this can be done for minimal additional cost.
2. Identify no regret investments that make sense whatever the future DSO model looks like, where the benefits accrue in the current price control period.
3. Identify innovation projects that can move our understanding forward, particularly where the benefit is uncertain or is expected to materialise in a future price control period.
4. Use business as usual funds to embed DSO capabilities if a business case can be made
5. Apply for Innovation Roll-out Mechanism funding for cases where there is clear customer benefit but the current incentive regime cannot justify investment within the current price control.

“When policy-makers, regulators, industry and wider stakeholders have a clearer view of the best way forward, it may be appropriate to include additional allowances for the DSOs that recognise the added value that DSOs can provide, and the additional risks involved in operating a more complex system,” it added.

Commenting on the report, UKPN chief executive Basil Scarsella said that networks are “on the verge of a change as significant for electricity as the advent of broadband was for telecommunications”. 

The report explained what roles and capabilities UKPN believes to be essential to a DSO, as well as outlining a roadmap for developing these.

The two major roles it defines are “supporting whole system optimisation” and “enabling markets”. The first of these will require much closer coordination between distribution networks and the transmission and system operators said the document.

It cautioned that previous research and demonstration projects showed “that there was a significant risk of service conflicts between the GBSO [GB System Operator] and the DSO, with the impact particularly affecting the DSO”.

Similarly, it observed: “In some parts of the network, the volume of DER [distributed energy resources] is such that for parts of the year generation can exceed local demand, resulting in ‘reverse’ power flows onto the transmission network. If these reverse flows become sufficiently large, this can lead to technical constraints on the transmission network and, ultimately, the need to reinforce the transmission network.”

In terms of capabilities needed to deliver the DSO transition, UKPN identified advanced cyber security as key.

There is a need to “develop our existing cyber security capabilities so that our cyber defences are continually resilient to the changing risks and threats that could be targeted at a much more open and interactive power system”.

UKPN has called for feedback and responses to its consultation report, which can be read in full here.